IT is changing how we do so many things so quickly, that I have decided to start posting some of the ideas that I think can be developed into commercial products to take advantage of these advancements.

Today, I will start the series with an idea for a “Smart USB”

Problem: Many services hold valuable information we treasure and wouldn’t want to lose. For example, all of our Facebook pictures, our files at cloud storage services like Google Drive, Dropbox, iCloud. Flickr. Then there are SMS messages, contacts, local pictures, you name it.

Solution: Imagine a USB that when plugged, connected automatically to all your services and did a backup of all files. Of course, the first time you plug it in, the system would ask you to synchronize your accounts and select which folders you would like to backup. Once it has been configured, you would then plug it in any computer and the USB would run a software in the background connecting to all your services and syncing your files. It would be a local, portable backup of your online backups.

After more than a 50% drop in value, I’d like to jump in the Facebook conversation to explain why I believe that there is significant upside potential for Facebook shares. At the present time, there seems to be concerns on the large amount of shares that will be unlocked soon, but more fundamentally there is a cloud of doubt on: 1. how Facebook can monetize mobile traffic, 2. other sources of revenue available, 3. migration to other social platforms. The bottom line is, can Facebook generate loads of cash and sustain growth?

To address these concerns, I’d like to first cancel the first one – which is the 2 billion shares that will be outstanding. Although this represents a short term challenge of basic supply and demand, it does not affect the fundamentals of the company, which will be the ones who will dictate Facebook’s valuation in the long term. Thus, let us focus on the other issues at hand, which is how they will make money, and how they will retain control of the social layer.

To understand my point of view on Facebook’s social layer and what it represents for the company, you can see here and here. Basically, Facebook has a monopoly over the Internet’s Social Layer. Their 900 million member personal data makes them the most formidable partner to marketers trying to reach their customers online. So the question is, Can someone else build a competing product that is capable of amassing such a large amount of personal data from nearly 1 billion people? If your answer is yes, that still doesn’t erase the fact that Facebook still owns the personal data as well, which would allow them to monetize it. Therefore, even if some other social networking site can get people to share so much personal data with them (which I doubt), the time it would take them would give Facebook a considerable advantage over that competitor. On the other hand, if your answer is no, the value of Facebook is considerably higher than it is today because of what they will be able to do with that data that no one else will.

Will traffic for Facebook’s desktop site sink? Yes. Will traffic to its mobile app become higher than its desktop site? Yes. Will traffic to Facebook properties begin to decrease? Very likely. Does that matter? For its revenue, not much and here’s why. Investors sold Facebook shares after seeing Facebook’s first quarter report, where revenue growth from display ads decreased. This raised a red flag in Facebook’s ability to sustain their growth and valuation. Since then, the company has continued a downward slope to a market cap of around $50 billion. However, looking at display ad revenue from Facebook’s site as a measure of the company’s capacity to generate revenue is a mistake. I believe that this measure will continue to remain weak in comparison to other sources of revenue (although it will continue to rise), but it won’t matter as much for Facebook’s bottom line in the long term than other products.

Forget games, forget Zynga and its Farmville and all those other fickle products. Facebook’s value is in its ability to package all of its members’ personal data into an external marketing engine directly competing with Google Adsense. In 2011, Google generated $10.4 billion in revenue from “Google Network Members’ Websites”. Anyone familiar with the product will know that it is a contextual advertising marketing platform whose principal source of targeting relies on an algorithm that matches relevance of a web page and an ad, and can limit it to a specific geographical sector. The system allows anyone to create these ads in minutes, and is responsible for about a third of Google’s revenue. This will be Facebook’s greatest source of revenue if they are able to bypass privacy obstacles.

Google knows they need more personal info. They have plugged their social networking site Google Plus into every single product they have in hopes of preparing for the competition that Facebook will create. Google Plus continues to fail at this, and despite claims of high traffic numbers for Google Plus, we all know that our society “likes” (Facebook) instead of “plus” (Google). In other words, people visiting an external website are far more likely to click on Facebook’s “like” button, instead of Google’s. Everytime a user “likes” an item, Facebook’s value increases. As Facebook continues to dominate this personal data storage, their Google Adsense competing product becomes much more valuable than Adsense.

The product I am talking about doesn’t exist, but it has to. Facebook’s Adsense will be very similar to their internal ad engine, except that it will allow marketers to advertise anywhere in the web. Facebook will be able to command much higher rates than Adsense, because Facebook will allow them to target their customers in more detail. For example, a marketer could advertise to people that are celebrating their birthdays, people who are engaged, or to people who like Coca Cola. These are just very small examples of a much more elaborate campaign that can be tailored, given Facebook’s massive personal information.

Commanding a greater amount of money for these campaigns would allow Facebook to also share more money with the webmasters hosting the ads, which would be an incentive to drop Adsense in favor of Facebook’s product. That move could bite in directly into Google’s Members’ Websites revenue. Growth rate in that line has been a healthy 20% year over year. If marketers would be willing to pay more for Facebook’s targeted ad campaigns across the entire web, it could quickly become a $10 to 15 billion revenue source in the next year or two, which is five times Facebook’s 2011 revenue. Attracting more advertisers with this product would also benefit its internal property revenues, as more of their internal impressions could be filled and perhaps at a higher price.

If you believe the product I have just talked about will not exist, then a $50 billion market cap is probably right. However, if this product is launched, then the current valuation appears significantly undervalued. The more likely question is not if they will launch this product, but when. And when they do, it is my belief that Facebook and Google shares will be affected inversely.

All these considerations are for a term of 1 to 3 years. For the short term, uncertainty about the company’s direction and the large amount of outstanding shares could put some downward pressure into the stock, despite its fairly low valuation. For the longer term, as technology progresses, other significant sources of revenue can be mined from Facebook’s personal information field. For example, as web browsing transfers to mobile platforms, the combination of geographic location with personal preference data opens up the possibilities for other types of targeted advertising. To see a basic explanation of this, you can read the article I wrote on mobile ads. On the other hand, Zuckerberg’s voting power dominance of the company is a risk issue that can make investors uneasy. His ability to communicate his vision and remain relevant as technology changes will be a determinant factor for the company’s long term progress.

*This article is not financial advice, nor is intended to recommend the purchase or sale of any stock or investment. Please consult your financial advisor for investment guidance.

Action Ads
Instead of branding, the most valuable ad experience in the mobile space will most likely be a combination of demographic and geo data aimed at inducing a desired action at the moment the ad is shown.

This is all possible by integrating the social sign up (log in via facebook), identifying the location of the person via triangulation, gps or other methods, and remembering their behavioral history. This mixture would allow for highly targeted ads that request an action, such as increasing a sale amount at the checkout lane.

Take for example someone waiting in line to pay at Walmart. The phone can identify the user through the background running walmart app, which knows who the user is, what has he purchased before, what matches his interests, current specials, current store inventory, etc. The union of these variables can be used to determine convinient action ads, which can automatically generate a personal coupon or suggest to the user an item to buy.

Another example would be from a third party app. In this case, the same user at walmart is not running the walmart app in the background. Instead, a user is reading the news via an app like wavii, which both uses facebook login and maintains personal information of the user. That user within the wavii app can also be shown an action ad from walmart, suggesting the purchase of an ideal product match or coupon.

It needs no explanation that an action ad’s impact can be measured almost instantly. This allows marketers a more direct understanding of their ad performance and cost analysis. From an app owner perspective, action ads can serve as higher revenue sources than CPMs or CPC arrangements, given that an action ad can be tied to a commission on the sale.

An Internet of Things
The whole action ad strategy gets even better with the introduction of RFIDs into products. With this “Internet of things”, mobile business becomes the center stage of a large chunk of commerce. In this scenario, a person’s smartphone can identify the products in a household in realtime and keep a history of typically available products. An app can determine when there is a shortage of a product or whether there are special sales on the internet or nearby stores of commonly purchased products. Again, action ads can trigger the purchase of these items, like generating an online order with delivery.

Action Ads can also be beneficial for the travel industry. When arriving to an airport, action ads can display nearby hotel rates for booking, available taxi and drivers (ubercab), individual housing (airbnb), or available dining seats at the hottest restaurants (opentable) targeted to a user’s preference.

It is of common knowledge in the domain investment community that .us domain names are not the default choice for United States companies seeking to have an online presence. It is also of common knowledge, that as a result of american’s preference for .com as their national domain extension, .us domain names are assigned a value far below their ccTLD counterparts, such as Germany’s .de (Aktien.de $725,000), UK’s .co.uk (Beds.co.uk $130,000) or Australia’s .com.au (Deals.com.au $100,000).

This week, the DNJournal will most likely announce the purchase of a .us for mid four figures. The amount of the sale is almost insignificant, but I was the buyer, and in this post I will explain my reasons for believing that the .us is highly undervalued and carries a potential for companies seeking to develop an online presence with a prime generic name.

There are two main factors for which I think the .us ccTLD has lagged in value. First, as I said above, americans prefer .com – they associate it with their national extension. Even if a .com weren’t available, it is fair to assume that there will be a preference to choose another gTLD such as .net or .org, over the official ccTLD for the US, .us. This assumption can be easily corroborated by the number of sales and dollar amount per sale for gTLDs vis a vis .us.

The second factor is the restriction for .us ownership. Only American citizens or permanent residents are allowed to own a .us, and this is exactly the population that rejects .us domain names. If a european citizen saw value in a .us, there couldn’t be a way for that person to acquire such a domain name without much hassle and risk. Thus, the small population that can purchase the extension is its worst customer.

But then, why do I think a .us carries much more value than the market is currently assigning it?
The answer lies in the fact that there is a global perception on ccTLDs, which extends the relationship of any ccTLD to one not circumscribed to the specific ccTLD population, but rather as a geographic presence towards the global community. In other words, when a portal from Russia opens with their ccTLD .ru, like Mail.ru, they are not just communicating to the Russian community about their presence. Rather, Mail.ru becomes a portal for all global citizens searching for contact with Russia. All of the world -not just russians, will recognize and seek mail.ru when wanting to communicate with the russian community.

Outside of the US, it is evident from all the local media that ccTLDs are the default choice for companies to communicate with users. Thus, all internet users outside of the US have a psychological tendency, reinforced by local media, to see the web through ccTLDs. It is only americans who predominantly only experience the web through gTLDs, primarily .com. And so, therein lies the opportunity.

First, it can be speculated either way on the adoption of the American community on a .us. One can argue that american users will be confused and tempted to type in the keyword and then .com. Others can argue that branding will be harder and carry less prestige than the .com. I, on the other hand, have confidence in the ease of branding that carries a prime keyword .us. It further resonates on the prevalent patriotism that distinguishes americans.

However, there is another way of looking at the opportunity, and that is as a portal for the rest of the global community. It is much easier for a foreign citizen to understand and to recognize a portal using the .us extension as an american portal. Therefore, foreigners will want to participate in a .us portal with the understanding that they are participating in an american environment. The .us is easily perceived as American soil by the rest of the world. And that is where the value of a .us rises. If we consider the .us extension as a window to the US for the rest of the world, where our customers are not just Americans, but the global population seeking contact with Americans, we find that a .us can hold a huge market outside of its borders.

It is 12:30PM, November 4, 2011 and the Wall Street Journal reports “Groupon Opens Up 40%” The current price gives Groupon a market cap of around $13 billion. However, the company is still hemorrhaging money. There are probably a few reasons why the stock is up – 1.) the size of the offering is a very small percentage of the company, 2.) there is plenty of hype, 3.) internet IPO’s usually get strong demand.

Now, what is important about this is to stick to the fundamentals. As I wrote before,

As I become aware of efforts to create technological platforms or to mechanize operations, the dominant theme across the board seems to be the lack of understanding of the evolution in IT resources and the dramatic cost reductions it offers to enterprises looking to create or manage their IT departments. One possible explanation for this is the chasm that exists between management (business educated), IT engineers (university educated), and current technology. Management appears to have been taught that IT is expensive, complicated, and incomprehensible to all except IT engineers. College educated IT engineers, on the other hand, appear to have been trained and polished in programming languages that were hot five to ten years ago. Current technology, however, has migrated mostly to the cloud and developed the tools and solutions necessary for most small and medium sized organizations, in order to allow them to create their projects on top of the cloud for a fraction of the original cost.

As such, the current modus operandi of small to medium businesses seems to be circumscribed to the acquisition of local technology consulting resources, oftentimes headed by IT engineers who hold on to the retrograde assumption that IT platforms must still be programmed from scratch and deployed in local (and oftentimes expensive) server farms. This presents three mayor costs – 1. Time from conception to deployment rises by a factor exponentially higher, relative to current pre-packaged cloud solutions; 2. As a result, monetary cost of the project also increases drastically; 3. And third, because the solution is custom programmed on the spot, operational and security bugs pose a continuous inconvenience, risk, and recurring cost and dependency on patches, which can render the IT project obsolete in a short period of time or exorbitantly costlier across time.

To visualize this conundrum, let us see an example of a real project currently being launched for a medium sized business, whose name I will not mention for obvious reasons. They are in the service industry and currently run a proprietary software solution that has been customized to serve their HR, CRM, and accounting needs. The solution runs in a local server farm, hosted at company headquarters, managed by the company’s IT office and assisted by the external consulting expert. Apart from being highly sophisticated, making it impossible for most users to make any use of most of the features the software has, the software is in continuous needs of interventions by the external consultant and of periodic upgrades. To get an idea of cost, the price tag on the next upgrade is a little over $1 million.

It is unquestionable that such software was the obvious and right choice at the time of its deployment, nearly ten years ago; but to continue investing in that solution now is pure economic madness and an evident example of complete ignorance in the current state of technology. For one, there is an enormous cost in the daily operation of maintaining the servers up-to-date. Then, there is the huge upgrade price tag, which usually comes around every two years. And to top it off, the software still requires constant support from outside consultants. A modest estimate in dollar costs for this project is around $1 million per year.

The Cloud is here to Stay

Cloud solutions are real, they have been with us for several years now, and they are not just the future of IT – they are the present. Similar HR, CRM and accounting solutions are already available through SaaS and PaaS solutions. Such alternatives represent clear benefits that outmatch those of local IT deployments in almost all of the times. Companies like Salesforce.com, one of the pioneers in this industry, revolutionized the software industry years ago, yet very few recognize it. Many IT engineers are trained in programming locally and have turned a blind eye in the reality of current IT solutions. And it is perhaps because they have failed to learn the single most important lesson in IT, and that is that a year in technology is equal to 10 years in any other industry in terms of change. Ferociously fast change is the only constant in technology. This means, that whatever you thought was best five years ago, it is most likely obsolete or highly inefficient by now.

And so, going back to the million dollar yearly operation of the midsized business IT department, that same operation can be ran on Saas and Paas solutions for less than $250,000. Aside from the economic benefits, there are the benefits of generally higher uptimes and lower costs in IT equipment purchases and maintenance, since users can run on thin clients.

To sum it all off, if you are a medium or small business, you should push your IT consultant to find a ready-made, cloud-based solution that fits your needs, rather than spending the time and money having a custom program developed for you. The cloud solution will upgrade itself without your business having to invest any further resources, and you can increase or migrate into larger or different solutions as your needs change, only paying fractionally more as you grow.

In the end, I like to compare the current change in IT to that of a car. Asking for someone to build you a platform and program you custom software to meet your IT needs is like asking an engineer to build you a car, because you need to get from point A to point B, when instead you should be shopping around to buy the best car that fits your needs.

As new investment opportunities arise in the internet sector, several factors must be considered in the proper evaluation of these companies. Many parallels from the Internet bubble can be drawn, with slight differences. On the one hand, some companies are attempting to disguise their numbers with new fancy terms, in order to divert attention from the fundamentals. Yet, on the other hand we have a more mature internet than back in 2000, which can significantly influence the leader position strength in these current companies.

Groupon

No, ACSOI is not the new EBITDA circa 1999 Amazon. The reality is that businesses have to make money and Groupon has become an expert at burning cash, at a rate of $100 million last quarter. Despite being touted as the fastest growing company ever, there are serious flaws which make Groupon an extremely risky proposition.

First of all, their model requires a massive number of salespeople. Thus, in order to grow, Groupon has been hiring thousands of employees, pushing Groupon’s numbers further in the red. Then there’s the issue with entry barriers for competitors – there are none. Groupon’s service can be, and is being replicated by thousands of competitors eating away from Groupon’s market. Then there is Google and Facebook, which both are in more intimate positions with potential customers, which can serve as an incentive for these giants to enter Groupon’s turf. The lack of an entry barrier for competitors, and the astronomical valuation that the company currently has, makes Groupon a poor choice for an acquisition.

At this point, only a secret, innovative approach can save Groupon – and that is highly speculative. Even an alliance with one of the Internet giants is not enough to reverse the downward spiral that Groupon appears to be following. An alliance might just delay the process of failure, as was the case of MySpace when it signed with Google. It ultimately went under, once the Google contract had expired.

All in all, I see Groupon as a poor investment.

Facebook

With Facebook, there is something powerful that goes beyond any rational analysis that one could make – and that is their vast pool of talent. Back in the 90’s, Bill Gates was asked which competitor he was most afraid of. He said, Goldman Sachs. His logic was that there is a competition for talent and whoever attracts the most talent will be in a position for success. Facebook shines in their aggressive history of attracting talent from all the top companies.

Talent together with the enormous power held from their network effect is a combination which could yield many good results. Unlike MySpace, which was the first social network to capture mainstream, Facebook is growing roots, deep roots within the Internet fiber, which places the company in a unique and monopolistic position of controlling the social layer of the internet.

This control of the social layer is the single most valuable asset the company currently has, and much consideration must be given to their capacity to retain control of it. In order to determine whether Facebook is a good long term investment, there must be an understanding of how well and for how long Facebook can control the social layer. There are various ways to see the evolution of the web, which can draw some possible outcomes. In a recent paper, I proposed one possible outcome which predicts that control of the social layer will cease, and an open format will come as a replacement:

“Facebook has done the job of transitioning the social layer element of the Internet and as history shows, we will eventually come out into the open web again. Instead of logging into Facebook, the social layer will permeate throughout the whole web – think “like” buttons. Instead of a singular social place, the entire web will be social and the social intelligence will be distributed – think Diaspora. The social component will feel natural to the average user because of their experience with the closed Facebook system, and the user will easily navigate and interact with this new integrated component.”

It is my opinion that a transition to an open format will occur. However, it is too early to predict when this will happen. Attempts like Diaspora have gained little traction and Google+, despite its stellar opening is losing steam as well. Thus, the timing for Facebook might be just right.

Given the uncertainty of the above, there is still relative calm in the medium term future for Facebook’s control. Facebook still has the talent, and they are still growing at a healthy rate. In terms of monetization, they have much room for growth and their Facebook Credits can be a formidable source of revenue. Ad targeting is generating significant revenue, and I see room for improving and expanding on this segment also.

Finally, there is the basic consideration of psychology. Never in the world has a company touched so closely the lives of so many people. Facebook has connected the world, and many individuals will certainly be very interested in buying a piece of stock. Average Joe’s won’t think twice about Facebook’s market cap, rather they will just buy. In this frenzy, I cannot help but think that those who entered early through SecondMarket will stand to reap many profits from their investments. Facebook’s valuation at their IPO will most likely be comparative to Palm’s IPO launch.

Facebook stock at current $80 billion appears to be a good investment, given the quick pop potential it has on its IPO mania. Obviously, more consideration must be given on the long term viability once their numbers are out. However, given that Google extracts much of its revenue from a very similar model (contextual advertising), and Facebook has captured much of the web’s traffic, it can be reasonable to assume that Facebook could sustain a valuation close to Google’s current $160 billion.

*This article is not financial advice, nor is intended to recommend the purchase or sale of any stock or investment. Please consult your financial advisor for investment guidance.